What if Amer­ica pulls out from Nafta?

Pres­i­dent Trump wants to with­draw from the agree­ment, and with ne­go­ti­a­tions on rocky ground, that risk could soon be­come a re­al­ity

ince North At­lantic Free Trade Agree­ment (Nafta) came into ef­fect in 1994, United States’ trade with Mex­ico and Canada has more than tripled, grow­ing more rapidly than US trade with the rest of the world. Mex­ico and Canada are now the sec­ond and third­largest ex­porters to the US, af­ter China. And the two coun­tries are the lead­ing im­porters of US prod­ucts.

Trump has crit­i­cised Nafta for cre­at­ing an un­fair play­ing field, al­low­ing Mex­ico to steal jobs from the US and open­ing the bor­der to cheap, tar­iff-free goods. He wants to bring fac­tory jobs back home.

But pulling out of the pact could have un­in­tended eco­nomic con­se­quences. Over the past quar­ter cen­tury, Nafta has re­shaped the US econ­omy and its demise could raise costs for US com­pa­nies and con­sumers.

The Nafta agree­ment al­lows any of the coun­tries in­volved to with­draw six months af­ter no­ti­fy­ing the other par­ties. Congress could op­pose a White House de­ci­sion to with­draw, ar­gu­ing that the Con­sti­tu­tion gives Congress power to “reg­u­late com­merce with for­eign na­tions”. Mem­bers of Congress could also threaten to stall Trump’s leg­isla­tive ef­forts, like tax re­form, in or­der to stay his hand.

But there is no lan­guage in Nafta’s au­tho­ris­ing law passed by Congress that re­quires con­gres­sional as­sent be­fore leav­ing the pact. So Trump could eas­ily dis­solve Nafta with the stroke of a pen.

Un­der Nafta, the three coun­tries pay noth­ing on most goods that cross the bor­der. Af­ter the US ex­its the pact, the tar­iffs, or taxes, that Canada and Mex­ico put on its goods would rise. For some goods, tar­iffs could go as high as 150 per cent. That would cause prices to spike and cut into com­pany prof­its.

All three coun­tries are mem­bers of the World Trade Or­gan­i­sa­tion (WTO), so tar­iffs could re­vert to those lev­els. Cur­rently, they are 0 per cent for most goods un­der Nafta.

Push­ing prices up

Af­ter Nafta, the WTO rules would ap­ply to trade be­tween the US and Mex­ico. Tar­iffs on agri­cul­tural ex­ports to Mex­ico are par­tic­u­larly costly, in­clud­ing a 15 per cent tar­iff on wheat, a 25 per cent on beef and a 75 per cent tar­iff on chicken and pota­toes. But goods like soap, fire­works, hand­bags and many ar­ti­cles of cloth­ing face tar­iffs of 15 to 20 per cent. Mex­i­can goods would, in turn, face an av­er­age US tar­iff of 3.5 per cent.

Trade ex­perts are de­bat­ing whether Canada and the US would re­vert to a pre-ex­ist­ing free-trade agree­ment be­tween the two coun­tries that was su­per­seded by Nafta. If not, US ex­porters would face an av­er­age WTO tar­iff in Canada of 4.2 per cent, again with much higher rates on some goods, in­clud­ing 27 per cent for beef and 18 per cent for most ap­parel.

Higher tar­iffs would push prices up on a range of goods. Many ve­hi­cles in the US are man­u­fac­tured in Mex­ico, like the Ram Heavy Duty pickup truck and Ford Fu­sion, while Dodge Chal­lengers and Chevro­let Equinoxes are as­sem­bled in Canada. Prices would also surge for Mex­i­can fruit and veg­eta­bles that fill US gro­cery stores.

The White House ar­gues that a bet­ter trade deal would sup­port com­pa­nies mak­ing goods in Amer­ica, thus cre­at­ing more Amer­i­can jobs. That would likely be true in some cases. The US mar­ket is a very large one, so some com­pa­nies would prob­a­bly re­lo­cate pro­duc­tion to the US to avoid pay­ing tar­iffs.

But other com­pa­nies might de­cide its cheaper to re­lo­cate their man­u­fac­tur­ing out of North Amer­ica en­tirely. They could, for in­stance, pro­duce goods en­tirely in China and then pay the US tar­iff in­stead. The US tar­iff on pas­sen­ger cars is only 2.5 per cent, so if Nafta falls apart it may be more cost-ef­fec­tive for com­pa­nies to make cars in Asia.

A con­tentious col­lapse

A with­drawal from Nafta could set the stage for a new trade pact with the three coun­tries, or per­haps a bi­lat­eral trade deal with Mex­ico and an up­dated agree­ment with Canada. But fol­low­ing a con­tentious col­lapse of the agree­ment, Canada and Mex­ico may be in no mood to ne­go­ti­ate. That could put the US at a dis­ad­van­tage. Mex­ico and Canada could re­main mem­bers of Nafta and con­tinue trad­ing on its terms. It’s im­por­tant to note that the Euro­pean Union has signed free trade agree­ments with both Mex­ico and Canada that low­ered tar­iffs on most prod­ucts to zero, mean­ing that Euro­pean com­pa­nies may have an edge over Amer­i­can com­peti­tors in those mar­kets.

In the af­ter­math of Nafta, the most likely sce­nario is that Canada and Mex­ico would push ahead with trade agree­ments with other coun­tries. Both are still in dis­cus­sions to pass the Trans-Pa­cific Part­ner­ship, a mul­ti­coun­try trade pact that Trump with­drew the US, from on his fourth day in of­fice. That deal would give Canada and Mex­ico tar­iff-free ac­cess to sev­eral lu­cra­tive mar­kets, in­clud­ing Ja­pan. Ana Swan­son and Kevin Granville are colum­nists for New York Times.